China’s first rate cut since 2008 has unlocked a wave of infrastructure financings and big-ticket loans. Aside from creating opportunities for commercial lenders, however, it has also triggered a price war.
Source: Reuters/David Gray
Actors wearing traditional costumes march through a small door as they prepare to take part in an ancient Qing Dynasty ceremony during the opening of the temple fair at Ditan Park in Beijing
China’s recent interest-rate cut has resulted in a promising loan pipeline, volume growth for the second quarter, as well as reduced pricing on both domestic and foreign currency loans.
The first six months of the current year represent the best first half since 2009 for China onshore syndicated loan volume, with over US$20bn of loans – a 28% year-on-year increase from US$15.46bn and more than double the US$9.32bn for 1H10.
Tang Maoheng, Bank of China’s chief product manager, corporate banking unit, said this year’s loan market certainly looked rosier – thanks to the rate cut.
“It will take a while before the loosening has any major impact, but the market is already shown steady growth,” Tang said.
The People’s Bank of China, in its first rate cut of 25bp since the global financial crisis, has allowed banks since June 8 to offer rates on new loans as low as 80% of the PBoC rate. The figure is 10 percentage points below the previous 90% limit.
In addition, two reserve requirement ratio cuts earlier this year of 50bp each time brought a long-expected loosening of liquidity.
Onshore loan pricing dipped as a result of better liquidity as locals rushed to lend and undercut pricing on potential deals.
“The move was a call for rate liberalisation from the central bank. If loosening continues, pricing will drop even lower,” Tang said.
Already, foreign banks in China are facing pressure from local lenders’ undercutting prices. A source at one foreign bank said borrowers told the lender that, compared with local banks, its pricing was not competitive in recent bids.
Pricing drops … abruptly
Since 2010, most onshore deals had been priced at 100% of the PBoC rate or above, but, recently, pricing plunged almost immediately after the rate cut.
Shenhua Group, for example, is offering 90% of the PBoC rate on the Rmb30bn (US$4.7bn) financing to back its acquisition of State Grid Energy.
Meanwhile, project and infrastructure financings in the market are now already seeing price talk at 90% and, some, at 80%. Until May, such deals were paying on average 100% of the PBoC rate.
“It will take a while before the loosening has any major impact, but the market is already shown steady growth”
US-dollar loan pricing is also falling. CDB Leasing paid a margin of 450bp over Libor on its loan in February. Three months later, parent China Development Bank paid only 240bp on a US$200m three-year loan.
To take advantage of the trend, some borrowers are asking lead banks to reduce pricing after the mandate letters are signed, according to sources.
“Not every lender will immediately accept the sudden change. For us, 80% of the PBoC rate is not acceptable; maybe 90%,” said a banker with a Japanese bank. “However, for a top credit like CDB, 240bp is acceptable.”
Some local banks are still trying to adapt to the sudden – and substantial – price cuts.
“We used to ask for 105% of the benchmark, now 100% is fine. Still, we will not be too keen on loans that pay 90%,” said a banker at a mid-sized Chinese commercial lender. The banker did say his lender had participated recently in loans with under 90% pricing, but for ancillary businesses.
Nevertheless, the price cuts have not deterred lenders. Many had been holding on to liquidity and, are now, finally, able to “turn on the tap and let the water flow”.
Banks enjoyed a lending spree in 2009 after the central government rolled out a Rmb4tr stimulus package to weather the global financial crisis. However, the party was soon over. The country started applying the brakes in 2010, with further tightening the next year to cool the overheating economy, leaving local government debt to pile up.
With the “tap turned”, many local banks were expected to start lending aggressively, sources said.
“There will be more deals to come with the loosening. I’m very optimistic. In our performance review, total volume and deal count matter more than yields,” a banker said.
It is not just the locals enjoying the loosened purse strings. Foreign banks have welcomed the larger US$24bn mid- to long-term foreign debt quota that China’s National Development and Reform Commission allocated to them on March 29.
Priority projects
The pace of overseas acquisitions by Chinese corporations is also heating up, and is expected to boost loan volume. Besides Shenhua’s Rmb30bn jumbo loan, Dalian Wanda Group is also expected to raise as much as US$3.1bn to back its acquisition of US cinema chain AMC.
However, it is domestic infrastructure and government-backed projects that are really driving loan volumes, accounting for more than half of overall volumes.
“The impact of the policies will start to show and better boost the market in the second half”
Local bankers are expecting the bulk of the lending to go to infrastructure and government-backed projects.
“The real economy is faltering. We barely have any business opportunities apart from government-backed projects and large-scale SOEs,” said a senior loans banker with a major Chinese commercial bank. “It feels like we are back in 2009 with so much money pumped into infrastructure projects, metro lines, etc.”
Furthermore, a strong deal pipeline is in the making as the NDRC hands out approvals to large-scale projects.
“There are many more projects ready to take off after NDRC approval than we already know from the media. And syndicated loans will meet their funding demands,” said a senior banker with a major commercial bank.
Recently approved projects include Baosteel’s production base in Zhanjiang, Guangdong, and Wuhan Iron & Steel’s production base in Fangchenggang, Guangxi, each estimated to cost more than Rmb60bn. Sources said major Chinese banks were already looking at potential financings for these two steel giants.
“The impact of the policies will start to show and better boost the market in the second half,” BOC’s Tang said. “The issue now is how to shift loan assets (from infrastructure and PF deals) to emerging sectors like alternative energy and green industries.”
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